100. It would be helpful to have a clarification.
(Mr Tebbit) This is not a doing down of the MoD's
budget, it is a victory for everyone.

Chairman

101. If Mozambique was not a good example of
joined-up government, I really must say Sierra Leone is. If the
Committee goes to Sierra Leone they will see where DfID are doing
an extraordinarily good job, as are the Ministry of Defence and
our Armed Forces. It is so good, like closed circuit television,
the crimes are being displaced to poor Guinea, who are less prepared
to match and tailor the RUF.
(Mr Tebbit) We are doing a prototype budget arrangement
with Sierra Leone at present. In this current financial year,
pending the introduction of this budget, effectively it is working
like that in practice. We are working very closely with DfID,
the Foreign Office, and the Treasury. The Treasury have topped
up departmental money and it is operating in the way I would expect
it to operate.

Mr Gapes

102. My questions are not critical of the concept,
it is just the actual way in which it works. We need to be clear,
in practice is it going to work any more effectively than in the
past or are we still going to have these problems? It seems, from
what you said, that the commitment is for all three departments
to work very closely together.
(Mr Tebbit) The commitment is there. In practice there
will be no doubt teething problems to iron out. I do not expect
this to create bigger problems or new problems.

Mr Viggers

103. Are there other examples of interdepartmental
budgets or is this unique?
(Mr Tebbit) There are a lot of these across government
now. The basic philosophy behind all this is that the citizen
is not getting the service the citizen wants, they are getting
the service that individual departmental structures provide for
them. There is a lot more effort nowadays in creating these cross-cutting
budgets so that the money is used to actually address the need
rather than address the particular departmental structural responsibilities.
I think there are about nine or ten.
(Mr Balmer) When the government published the Spending
Review 2000 document with all of the public service agreements
in it there were several at the back which covered the cost-cutting
reviews, most of which ended up with the pooled budgets.
(Mr Tebbit) The Foreign Office is involved in seven
cross-cutting budgets.

104. At what point will an operation be classified
as an A, B, C operation which is eligible to be subsidised for
or paid for out of this budget?
(Mr Tebbit) This is more for conflict prevention activity.
As I say, a major peacekeeping operation would probably be funded
directly from the reserve, as now. I would expect Kosovo to be
continued to be funded from the reserve. I would expect there
is an understanding that that is the case.

Mr Hood

105. Agencies. Looking over the last decade
there seems to have been a rising tide of new agencies, reaching
its peak a few years ago at 44. There have been mergers and disbandments
since, bringing it down to 37. Was there a grand design behind
these broad trends? Why is the trend now down? Have the benefits
of agencification exceeded the costs in some areas, or is it now
seen that some of these agencies were inappropriate?
(Mr Tebbit) I do not think so. I do not think there
was any particular significance attached to the number. Why it
has gone down is that some of them have been merged. We merged
some agencies into bigger agencies. Some have been absorbed into
business units, where we found that the agency was effectively
within the chain of command and it did not make much sense to
give it a completely independent existence. Basically the agencies
have proved their worth very successfully. The fact that we are
down to 37 from 44 I do not think is particularly significant
in terms of whether we believe or not in agencies. They are a
very useful thing. We now have 65% of our civilian staff working
in agencies, so it is a very big element of the department.

106. Are you telling the Committee that the
direction is to look for further mergers or are 37 as much as
you think you need? Will there be further mergers in the future?
(Mr Tebbit) If we felt we should change and create
new ones we would do it. The numbers have no particular significance
or magic about them. If I were to predict I would think that we
probably started by creating agencies within the sort of existing
structure and we did not think quite so carefully about the design
of agencies around outputs. As we are now looking much more in
terms of how to deliver the department's business I would expect
to see slightly fewer agencies. It has nothing to do with size
and the number, it is just the way that the world is moving.
(Mr Gould) To give you an example of that, we used
to have two agencies that were involved in aircraft maintenance,
one was based at the old naval air organisation, which looked
at rotary wing helicopters, the other was based on RAF maintenance,
if you look at it they are both doing the same thing and now they
are merged into one single agency.

107. Does resource accounting have an impact
on this?
(Mr Gould) I do not think resource accounting does,
but the fact that resource accounting makes you look at outputs
is part of the discipline of looking at the outputs. There is
a better way of organising the way all this work is done.
(Mr Tebbit) I do not want to sound too low key about
this because some of these agencies will have put up with a huge
strain during Kosovo. We made massive demands on them, like the
Storage and Distribution Agency, which had to push out a massive
amount of emergency requirements. Their work-load went up by something
like 75% and they coped absolutely brilliantly. They are winning
prizes, as it were. That particular agency was one of the finalists
in the TNT Modernising Government Partnership Awards. The MoD
agencies are very successful. Of all of the Government agencies
we have one third of the total. This is a big chunk of government
agency activity.

Mr Cohen

108. Can I follow this up? The Defence Aviation
Repair Agency and the Army Base Repair Organisation are both planning
to become trading funds in 2002. What is the purpose of that and
what additional benefits does that move bring?
(Mr Tebbit) We just apply the usual commercial criteria.
If the agency has external customers as well as the MoD then,
clearly, a trading fund is appropriate because there is visibility
about its efficiency and business. If the MoD as a customer has
other sources of supply, other than the agency, then equally it
is good to put the agency on a trading fund basis so it is competing
comparably with outside suppliers. We do not create trading funds
where the agency is solely supplying the Ministry of Defence because
it is an unnecessary complication, it is where we have outside
players and we have competition and we need to see a level playing
field.

109. The two I specifically mentioned here,
how do they fall into that criteria? The Defence Aviation Repair
Agency, does the MoD have other suppliers for that?
(Mr Tebbit) They will have to compete for their work
with private sector companies and show they are efficient, and
equally they will try to get contracts from the private sector.

110. Is this process really a process of softening
up for privatisation themselves?
(Mr Tebbit) Not necessarily. These are called "next
step" agencies. I doubt somehow that the RAF will rely entirely
on the private sector for its operational frontline servicing.
It need not move beyond the trading fund, there is no dogma there.
It would certainly be a necessary step if you were going to privatise
them, but doing that does not mean we are committed to that. Indeed,
we have other trading funds within the department, the hydrography
department and the Mapping Agency. I do not want to mention DERA
again.

111. I hear what you say about the commercial
element. What is wrong. For example, how are those two agencies
performing under the trading funds, are they under-performing
or are they doing all right? Why change if they are doing all
right?
(Mr Tebbit) Within our £23 billion I have to
make sure we get the very best value for money from whatever source.
This is the discipline that we need to make sure we have very
efficient organisations. It is not quite as simple as that. If
you have an operational requirement we do have to create a particular
arrangement to offset that bit of their costs which are necessary
for the operational deployment. We do have that built into the
model.

112. That is what I was going to come to, the
operational requirement, and ask a question about that. Firstly,
presumably, the implication would be there would be quite a lot
of job losses from this route if they are going to have these
structures and comply with them.
(Mr Tebbit) Or gains, if they are very effective and
take work away from the private sector. Provided, as I say, we
have full fairness and a level playing field, that bit of their
cost will be subsidised by us for the operational deployed aspect
of their work. There has been some quite detailed discussions
with industry to make sure there is a level playing field.
(Mr Gould) In terms of job losses, numbers in both
of those agencies have been going down because of cuts and throughput
of work. Where work was allocated not on a hard charging basis,
that has been happening anyway. One thing which being a trading
fund does is it makes it a lot easier for these agencies to start
joint ventures with private sector companies and to provide comprehensive
support, which is actually an opportunity for them. I do not think
becoming a trading fund presents any greater threat to job losses
than what was happening already, it does provide an opportunity
for them to get together with private sector companies, as is
happening in some parts of DARA to provide comprehensive support
for aircraft types. It is quite a good opportunity. What you do
tend to find when you have greater commercial discipline of the
trading funds is that some of the internal structure of those
jobs changes and you have, maybe, fewer managerial and supervisory
posts and more productive jobs.

113. What about operational guarantees, we want
our planes repaired so they can fly when we need them. If you
are setting up these funds what security of repair are we going
to have?
(Mr Tebbit) We make sure we have the security of repair
we need. I have to say, private companies have been pretty good
in supporting equipment right up to the frontline. In 1990 Vickers
were right there in the Gulf doing the tanks in the desert. One
would not want to be disappointed with the private sector industry
because when the call comes they have always responded. We do
negotiate a very detailed protocol with the private sector companies
so they are satisfied that it is a level playing field.

Mr Brazier

114. I cannot let that pass without saying,
it is a very artificial situation, because we had a clearly defined
frontline with no activity behind it. Somewhere like the Balkans,
where the situation was more complicated, had it turned into a
fighting war it would have been very different.
(Mr Tebbit) This is not some sort of underhand comment
for me implying that we are going to weaken the frontline's capabilities.
(Mr Gould) The fact is very, very little of DARA is
deployed on operations. None of ABRO is deployed on operations.

Chairman: We are going down there quite
shortly to talk to them.

Mr Cohen

115. This question of targets for the agencies,
we have dealt with them earlier on in the session on the agencies.
On the one hand you say it is stretching performance, but really
it is a bit like shifting the goalposts every year and you do
not really get true comparisons. I see in your report you say
that a lot of the agencies met certain requirements on them, presumably
some did not meet them, and that means some failed to meet them.
Taking that point aside, this whole business of targets does not
seem to me to be sophisticated enough for the agencies to get
comparisons.
(Mr Tebbit) There is always room to get better. Agencies
on average achieve twice the rate of efficiency of improvements
than the rest of the department. That is reflected in the budget
adjustments we make for their operating costs, that is a good
sign. As I say, we tend to look for targets which give success
of around 70% to 80%. This year they have gone down from a 78%
average to 72%. I think that is good because it shows we are being
tough with them, rather than simply moving up to 100% and saying,
"This is easy". In 1999, the year of the performance
report, 63% of the indicators showed an improvement. In the previous
year 48% showed an improvement in the performance. Measuring them
year-on-year does give one the ability to see if things are getting
better. It is a discipline that is proving very useful. You are
right, this is a very difficult area, this target setting business
and trading funds make it easier to see how organisations are
performing.

116. You are commenting on comparisons.
(Mr Tebbit) The comparisons year-on-year are more
reliable.

117. This is something that came out when I
looked at the Defence Review, in Annex G, United Kingdom Military
Assistance. There was a target there. Loads of countries are asterisked
as receiving MoD subsidy. Why do Spain, Sweden and Saudi Arabia
get MoD subsidy? It is page 86.
(Mr Tebbit) It does not mean they were subsidised.
(Mr Balmer) We have a small fund within the Ministry
we give to policy staff for subsidising, usually training for
allies, friendly nations. They can judge when it is in the best
interests of the Ministry of Defence or the government at large
to encourage a particular country to send students to one of our
training courses, who would otherwise not come if we charged them
a full rate. We do from time to time subsidise people on that.
We have a disciplined approach so that policy staff have to record
they have subsidised that piece of training from an internal budget.
That is what this is usually about.
(Mr Tebbit) We are very expensive as a training organisation.
It is better for us to subsidise and keep the costs real than
pretend that it is cheaper than it really is.

Mr Cohen: Thank you. I wanted to clear
up that point.

Chairman: The Committee's eyes glaze
over when we talk about resource accounting and budgeting. It
is only our Audit Adviser, Mr Balmer and Harry Cohen who really
understand what is going on.

Mr Brazier: And me!

Chairman

118. Looking at the National Audit Office's
comments on several departments' dummy runs, they were less than
complimentary. We heard of the Cabinet Office, the Department
of Health and Ofgas that the National Audit Office were giving
a disclaimed opinion when it came to the information provided.
They went on to say, "Because of a pervasive inability to
gain sufficient audit evidence the auditor is unable to reach
a view about the accounts. The National Audit Office or the MoD
gave us evidence of where the problems were in this dry run audit.
I would like to ask Mr Tebbit and Mr Balmer how heavily will the
National Audit Office be qualifying last year's, ie 1999-2000,
resource accounts? Will they be able to pass the accounts at all?
What happened with the last attempt, was it subterfuge or just
an inability to provide information?
(Mr Tebbit) It is a hugely big shift of change for
us with a budget so large. We have the biggest single change management
programme in Europe to do this. We had disclaimed accounts last
year and we are going to get a disclaimed account this year, I
expect to have a further disclaimed account. It is going to be,
in my view, a positive disclaimed account, in the sense that I
expect the C&AG to say that good progress is still being made
to resolve all the outstanding issues and to say he has confidence
and we will be able to move beyond the disclaimed accounts provided
this process is sustained, or we have a very positive report.
I ought to say, I would not be surprised if what we get from Sir
John Bourne also says this is a credit to the Ministry of Defence
rather than a failure, because of the size of the challenge. The
key problem that we still have is in the supply systems. As I
say, partly because we previously did not retain details about
the cash costs and, therefore, data on the value of our supply
chain was very weak. Once we paid for them, as it were, we then
ignored them under the old cash regime. The other thing is being
able to track the movement of these things as they go from an
internal bit of the department to another and move from being
assets under construction to consumption. We are getting better.
The Defence Logistics Organisation has about 16 priority programmes
to complete in order to do this. They are working flat out on
it. Although we have a disclaimer it is a very positive disclaimer.
That is about the only outstanding issue that we have. We also
know the range of the problem, it is not a black hole. We are
now starting our first year of full resource accounts. We are
having to plan on the basis of resources. It is going to be a
very difficult time. We are "falling fowards" in performance
but we are going to do it, it is going to happen. This is a transformation
of the way we do business. We are recruiting a lot of people to
move to a resource basis. We have had a huge internal training
programme as well. I am surprised Mr Balmer has any hair at all,
he was very dark haired not long ago.

Mr Brazier

119. None of these people will provide any long
term value for the frontline.
(Mr Tebbit) This will be tremendously valuable for
the frontline. We will be incentivising and moving equipment and
supplies faster through the system into the frontline. Once you
have a capital charge, once you are bearing the burden of unused
assets on your own budget, you just want to get it off and out.
The procurement organisation and the logistics organisation will
now have an incentive they never had before of moving these items.